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ECB Provides Extra Stock-Market Bounce

One of the clearest trends in European stock markets this year has been investors’ renewed faith in peripheral euro-zone stock markets and some domestic-focused sectors. Take French, Italian and Spanish banks, Europe-focused consumer-goods groups, and power utilities that suffered badly during the region’s financial crisis.

The logic has been simple. Growth prospects for companies in these countries and sectors look better as the euro-zone economy recovers than for many of Europe’s internationally-focused corporations reliant on now less vibrant emerging economies.

There has been one proviso, namely the willingness of the European Central Bank to nurture the single-currency area’s nascent recovery.

The upshot was that stock markets in Athens, up 2.6%, Milan, up 1.2%, Lisbon, up 1.2%, and Madrid, up 0.8%, led gains in afternoon trading after the ECB move. The benchmark DAX index in Frankfurt barely budged. The Milan stock market is the EU’s best performing bourse so far this year, up 15% compared with just 4% for the DAX.

ECB President Mario Draghi, right, arrives for a press conference in Frankfurt Thursday.

Agence France-Presse/Getty Images

The biggest contributors to gains among the components of the Stoxx 600 pan-European benchmark were banks including Société Générale of France and UniCredit of Italy. Other gainers included French telecom operator Orange SA, French auto maker Renault SA, and Italian power utility Enel SpA.

The gains were part of investors’ greater appetite for risk in the euro zone where, as well as bubbling stock markets, corporate bond yields and sovereign debt yields have fallen sharply in recent quarters.

There are still dangers out there as Mark Nash, a portfolio manger at Invesco was quick to point out.

“The knock on effect of a negative deposit rate will see yields come down across the curve and money flow into riskier assets in search of return or down the credit channel,” said Mr. Nash.

The central bank’s liquidity boost will be a big positive for peripheral bonds and risk assets in Europe, but the jury is out as to whether it can turn around disinflation and boost the recovery further. There are more entrenched problems with the euro-zone economy that extra ECB liquidity might not solve, he said. Economists have highlighted still record levels of government debt, rigid labor markets, pressure on incumbent governments from populist parties in some countries like France.